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When Hard Times Led to a Boom

By David Leonhardt April 12, 2011 10:00 amApril 12, 2011 10:00 am

Alexander J. Field, an economist at Santa Clara University, is the author of “A Great Leap Forward,” which argues that the terrible years of the Great Depression actually set the stage for the post-World War II boom. Mr. Field discussed his ideas at a recent book-signing party. The book will be officially released next week.

Valerie WolkAlexander J. Field, author of “A Great Leap Forward.”

Our conversation follows.

Q. You make the novel claim that the Great Depression years were good — or at least important — for the American economy. How so?

Mr. Field: In 1941, the U.S. economy produced almost 40 percent more output than it had in 1929, with virtually no increase in labor hours or private-sector capital input. Almost all of the increase in output per hour is attributable to technological and organizational advance. As I said in the title of my 2003 American Economic Review article, the 1930s were indeed the most technologically progressive decade of the century.

The conventional wisdom is that the war somehow magically transformed the doom and gloom of the Depression into the U.S. standing like a colossus astride the world in 1948. My counterargument is that potential output expanded by leaps and bounds between 1929 and 1941, and it was this expansion in capacity that both helped us win the war and established the foundations for postwar prosperity.Q. I would not have guessed that the economy was 40 percent larger in 1941 than in 1929, given how much it shrunk in the early 1930s. When did all the growth happen?

Mr. Field: There was a very strong recovery following Roosevelt’s election, interrupted only temporarily by the 1937 recession. Real G.D.P. almost doubled between 1933 and 1941 (90 percent increase).

An important point to understand, however, is that we’re not dealing in these years simply with the closing of an output gap (the difference between actual and potential). Rather, we are dealing with a moving target, as productivity increased, thus increasing potential, under the combined influences of big increases in R.&D. investment, new products and processes, spillovers from the build-out of the surface road network, and in some sectors, creative responses to adversity. That’s part of the explanation for why unemployment was still close to 10 percent in 1941.

Yale University Press

Q. What were the key innovations of the 1930s?

Mr. Field: What’s notable about the Depression years is the very broad range of advance. One can’t point to a single or even a few innovations that somehow defined the era. Nonetheless, notable new products included the DC-3, a plane introduced in 1936 that revolutionized commercial aviation; television, developed with venture capital funding during the 1930s and rolled out at the 1939-40 World’s Fair; and nylon stockings, introduced in May 1940, with 63 million pair sold the first year.

A number of products available in the 1920s moved from low-penetration boutique goods to mass-produced commodities. Case in point: mechanical refrigerators. Less than 3 percent of U.S. households had them in 1929, and they were expensive and unreliable, requiring extensive after-market service. In 1941, 44 percent of households had mechanical refrigeration, including 56 percent of urban households.

Automobiles saw major refinements in the 1930s. Heaters, radios, low-pressure balloon tires, and four-wheel hydraulic brakes all became standard. The decade saw the development of options we often consider standard today — power steering, automatic transmission, front-wheel drive, and V-8 engines. Aside from product innovation, significant process innovation occurred across the industrial sector.

And in contrast to the 1920s, advance was not limited almost entirely to manufacturing. Highway design in the 1930s excited engineers as much as did the information “superhighway” in the 1990s. The U.S. route system, built almost entirely during the Depression, represented a huge improvement over what had preceded it, with big benefits for transportation and distribution.

Organizational innovation also played a role. In railroads, treaties now allowed unlimited freight interchange. Rolling stock — railroad cars — from one road could move onto tracks owned by another, and while there, discharge and pick up cargo, and even be repaired in a “foreign” yard. The agreements and uniform tariff schedules that permitted this were critical in enabling U.S. railroads to carry more freight and almost as many passengers in 1941 as they did in 1929, using many fewer employees, cars, and locomotives.

Q. I think you’re saying that the Depression itself was not the fundamental reason for the innovation boom in the 1930s — the time just happened to be right. Or did the downturn itself play a role? And, in that case, is there any reason to hope that our current slump is laying the groundwork for future progress?

Mr. Field: On the one hand, it would be disingenuous to try and console those out of work with the thought that their sacrifices are laying the foundation for a better tomorrow. On the other hand, there is evidence that for some organizations and industries, just as for some individuals, adversity summons reservoirs of initiative and creativity that have long-term positive consequences. And based on Depression experience, we can be optimistic that when exciting technological paradigms are ripe for exploitation, work will continue on them, slump or no slump.

In thinking about the future, however, we should not overlook the important role played by the government. Federal spending was too small prior to the war to compensate for the decline in private sector capital formation and thus close the output gap. But it had big benefits on the aggregate supply side, as it complemented private sector initiative in expanding potential output.

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